Market Commentary
February 3, 2023
Making Cents of the Markets
Listen now to the most recent Making Cents of the Markets on CKNW. Lori gave an update on markets ahead of the Fed’s interest rate decision and an update on earning season’s results thus far!
As the March 1st deadline approaches, we discussed the pros and cons of investing in RRSP’s.
Click here to listen.
Beyond the Markets
Beyond Van Gogh: The Immersive Experience
This sensory spectacle will display 300 of Van Gogh’s finest works projected onto walls and floors. Immerse yourself in this new way of experiencing art. The exhibit will be at the Agriplex at Cloverdale Fairgrounds in Surrey from February 1st to March 5th, 2023.
Click here to purchase your tickets!
Be in the Know
What Happened to the Dreaded R Word?
The villain Anton Chigurh in Cormac McCarthy’s novel “No Country for Old Men” could have been speaking of central bankers when he spoke of self-deception: “They pretend to themselves they are in control of events where perhaps they are not.”
But so far, their fight to damp down the inflation fire they helped stoke appears to be working, all the while not doing too much damage (at least not yet) to the economy.
From today’s strong U.S. jobs report (517,000 net new jobs added) to the Fed citing disinflation is firmly in motion, there are reasons for optimism.
The ISM services index bounced from the realm of contraction to growth, moving from 49.2 in December to 55.2 last month. That implies an annual economic growth rate of 2%, which is a far cry from a recession.
Bloomberg argues that China’s re-opening stands to breathe a second wind to global growth and global inflation. Bloomberg’s modeling suggests global inflation may stall in the 5% range in the months ahead, a dramatic improvement from the 9.1% peak inflation seen in America and 10.6% in Europe, but a far cry from the 2% holy grail figure the Fed officially targets.
The U.S. employment cost index – a measure of wages and benefits – rose at a cooler 1% pace in the fourth quarter. Easing wage inflation was one more reason the Fed eased the pace of rate hikes to 25 basis points.
In Europe, the picture is different. The European Central Bank plans to keep hiking as it catches up to the Fed’s 4.5% to 4.75% range. The ECB’s hike this week puts it’s key lending rate at 2.5%, while the Bank of England’s 50 basis points increase takes them to 4%. European central bankers probably have quite a few rate hikes to go, a challenge North American investors shouldn’t concern themselves with.
Tech Giants Are Bouncing Back
The advertising algorithm known as Meta (formerly Facebook) announced a $40 billion share buyback. They also said this was the “year of efficiency”, suggesting they are serious about spending less on their speculative metaverse R&D. This is what the street wants to hear, as Meta has a fantastically profitable advertising business when it isn’t spending those earnings a metaverse fantasy.
There are many examples of software companies making expensive forays into the hardware game, only to fail. Microsoft buying the phone maker Nokia to get into the handheld phone business is an example. It failed, costing them almost $8 billion in losses. Amazon tried the same trick and failed, as did Google’s glasses.
A company that does know hardware competently is Apple, and they ran into sales challenges not seen since 2019. But most of it was due to production interruptions caused by Chinese factory closures related to pandemic lockdowns and related protests and riots. But that was temporary and Apple says production is back to normal.
Disinflation Hitting Cars
Tesla isn’t the only electric car maker fighting to bolster EV sales. This week, Ford cut the cost of its electric Mustang March-E crossover by up to 8.8% (depending on the version, that’s $600 to as much as $5,900), a response to Tesla’s cuts a few weeks ago.
“We are not going to cede ground to anyone,” said Ford’s chief customer officer on the EV side.
And that’s normally the cut-throat mentality found in the competitive automotive space. Tesla’s lead over its competitors seems to shrink by the day. And why wouldn’t it, with EV designs such as this concept SUV from Audi (the back window can shift forward to make it into a mini pick-up truck):
Part of the pressure to cut costs has been the plunge in used car prices, especially Tesla’s. It’s bad for corporate profits but good news for the inflation fight.
GM jumped 6% after strong earnings and guidance for 2023, despite the squeeze on profit margins.
The most interesting news out of GM was their decision to invest $650 million in Lithium Americas to help put their Nevada-based lithium mining project into production in 2026. They estimated there is enough of this key battery metal to support 1 million EVs a year and GM has pledged to buy all of it. The deal with also make GM the largest shareholder. Talk about future-proofing your EV plans.
Housing Blues
Pressure on home prices are rising globally. In China, sales are down by a third with the UK seeing its worst correction since 2008. Two-year fixed mortgages hit 6.65% last year, their most expensive in over a dozen years. And in Canada, 5-year fixed mortgages rose to over 6%.
According to Oxford Economics, housing price corrections tend to retrace 50% of the rise. Globally, prices rose 40% over the past decade.
In Canada’s hottest markets, prices were much hotter. Toronto’s market is down 14.2% from a year ago, according to the GTA’s benchmark. In Calgary, new listings have fallen to levels not seen in over 20 years.
In BC, we’ve also got a foreign buyer’s ban, increasing stress test requirements, and eight rate hikes from the Bank of Canada. This week, the BoC said it expects home prices to fall more in the near term. Housing weakness is one of the reasons they cited for pausing further rate hikes for the time being.
Our Strategy
Apple Vs. Amazon
It’s impossible to time successful stock purchases every single time. What is important, is to have a strategy with a well-established process in place that helps maximize well timed decisions. The strategy should include a continuous and thorough assessment of the fundamental and technical moves companies make as they encounter an ever changing economic environment.
That is exactly what we do with our active management approach. Having this process in place helps ensure that we stand behind our companies and that we continue to see the value that is important to help grow their stock price over a sensible timeframe.
For example, this week was a big week for the mega-sized technology companies, Apple and Amazon, as they reported their latest quarter’s earnings. We continue to own Apple, yet Amazon was sold back in December – about 20% higher than where it is today. Both investment decisions were made strategically.
Amazon disappointed investors, as profits took a hit due to soft consumer demand for their online products and slowing growth in their cloud business, which provides remote computing power to companies. With more workplaces forcing employees back to the office from the WFH (Work From Home) Model they established during the pandemic, we believe we will see more of it to come.
As mentioned above, Apple did not report the same decline in consumer demand. If it wasn’t for the temporary production hiccup, revenues would have grown.
It’s also worth noting that Apple did not announce any plans to lay off workers, as so many of their tech peers have.
Amazon is a different story. As shown below, Amazon was one of the companies to hire most after the pandemic to keep up with, what they thought was, increasing demand. With a rapid increase in their workforce comes higher costs for the company and that heavily weighs on profits.
Markets continue to move higher as investors digest earnings and project a soft landing for the economy (or no recession at all). We continue to be proactive in our strategy as we are investing in leaders within a wide variety of sectors. We welcome the bullish start to 2023 and look forward to a positive year ahead.
Visual of the Week
A bullish slingshot? In the past, when the S&P 500 has risen 5% or more in January after a negative year, the future returns have always been impressive. Granted, it’s only happened 5 other times. But the average return for after such price action has been an average return of 30% for the new year. This year, the S&P 500 was up 6% in January
The comments and opinions expressed in this newsletter are solely the work of Pinkowski Wealth Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Pinkowski Wealth Management does not assume any obligation to update it or to advise on further developments related. Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA
